Hopefully this scandalous evidence will pressure the new Tory/Lib Dem coalition to fulfil its promise of pushing the EU for full auctioning of ETS permits sooner rather later.

In theory, the ETS has great potential to make Europe’s efforts to fight climate change both more efficient and effective. At the moment however, as the report shows, the EU simply gives away a large portion of its ETS permits to the big polluters.

These permits authorise the holders to pollute the atmosphere, to agreed levels, at no cost. Yes – for free. This is absurd. The cost to the environment is clearly not zero. It’s mad that this forms the heart of an emission reduction scheme.

The current arrangements also have two very unwanted consequences: It encourages companies to grossly overstate their predicted emissions in order to sell those they don’t use to make a windfall profit (to the tune of £1 billion in the case of Arcelor Mittal, according to the CEO report) while at the same time removing any economic incentive for them improve their energy efficiency.

Auctioning the total quota of ETS permits would ensure that companies only receive the number they feel they will really use – and removes the incentive to be greedy in order to sell on excess permits at a profit. Equally important, it will make economic sense for companies to make efficiency changes that cost less than the equivalent amount of ETS permits. So if a new technology, like a boiler upgrade, costs £5 per tonne of carbon saved, versus a carbon price of £10 per tonne, making the technology investment becomes the sensible thing to do.

The other way of making ETS permits an effective stick (or carrot) for polluters to improve their energy efficiency is to put sufficiently few up for auction. This will push the price of the permits high enough to ensure that many companies take big action to pollute less – the whole point of the ETS in the first place.

Let’s hope the coalition will support these intentions with solid action, both at home and at the EU, where the ultimate decisions of the fate of the EU ETS will be made.